Home Buyers Overpaying for New Homes

New home prices are more than 5 percent above their 2010 levels and they could be leading a recovery in the housing market.

These homes have historically sold for slightly more than older homes. The new home premium makes economic sense since buyers should have lower maintenance expenses for several years.

In the past, this premium has averaged about 15 percent. In the most recent data, new home buyers are paying 45 percent more than they would for average, older homes in their community. At this level, the premium seems to be higher than buyers should pay and new homes could be considered overpriced.

The National Association of Home Builders, a trade association of the sellers of new homes, offers an analysis on their website that suggests a new home could be worth about 15 percent more than older homes. Their analysis is based on savings related to utilities and maintenance that new home buyers enjoy.

Given the record level of premium on a new home, it is not surprising to see that new homes sales have declined. Overpriced new homes could help the used home market find a bottom. While potential buyers may like the appearance of a new home, they may be more attracted to the value of an older home.

The new home premium should fall, and that could happen if prices on new homes drop or prices on older homes rise. An increase in older home values is the more likely way this premium will narrow since builders are holding low levels of inventory and starting fewer homes than normal.

This is good news for the housing market, although new home buyers should not be expecting to sell their homes at a profit for many years to come.